Superannuation is unavoidable. To fund our retirement years, we must all invest in super. Since 1991, Australia has had a compulsory superannuation system, with total assets in superannuation presently totaling approximately $3 trillion.
People are increasingly opting to handle their own super through self-managed superannuation funds (SMSFs).
Here are ten things you should know if you want to form your own SMSF.
1. SMSFs are growing more popular.
SMSFs are becoming more and more popular.
According to the ATO’s most recent estimates, there are over 600,000 SMSFs in Australia, with a combined asset value of more than $750 billion.
This accounts for almost one-third of all assets in the superannuation system.
2. Almost everyone can establish an SMSF.
According to H&R Block’s Director of Tax Communications, Mark Chapman, there are only two requirements for establishing an SMSF.
First and foremost, he adds, “you need a really decent pot of super.”
In general, if you have less than $250,000, an SMSF is probably not worth it because the fees of setting it up and operating it would soon deplete your balance.
Second, you want to have greater say over your super.
“Most people who have their assets invested in an industrial or retail fund have no control over what happens to their super; they give all that responsibility to the fund,” Mark explains.
3. Having an SMSF gives you power.
Having an SMSF allows you to take control of your superannuation, deciding how it is invested based on your particular preferences.
“If you have an SMSF, you are in charge of the money and make the investing decisions,” Mark recommends.
This kind of oversight is not available in retail or industry super funds.
Sure, your retail or industry super fund will allow you to make some broad investment selections, but you won’t be able to make the critical investment decisions as you would with an SMSF.
If taking control appeals to you and you believe you can outperform retail or industry funds, an SMSF may be worth exploring.
4. There are numerous advantages to having an SMSF.
“The primary advantage of having an SMSF is the aspect of control,” Mark says. “You can choose the investments that will perform best for you.”
You determine the investment plan and make the investment decisions with an SMSF.
This allows you to select assets that are appropriate for your present economic circumstances and that you believe will provide the best returns for your retirement.
Your decisions will affect the size of your retirement funds.
“The idea of power, of making your own judgments and perhaps outperforming the guys who run the big funds,” Mark says, “is pretty exciting.”
However, with this luxury comes responsibility.
5. An SMSF entails major duties as well.
When running your own SMSF, you must ensure that tax returns are filed, audits are performed, and compliance and administration are met.
“If you’re not truly up for it, the administration requirements may be quite a drag,” Mark explains.
You’ll have to hold trustee meetings, document them, and fill out numerous papers for the ATO.
“You can’t just set up the fund and forget about it,” Mark explains. “You have to be involved 365 days a year in making sure your fund is working for you and that you’re following with all of the laws, which are fairly complex.”
Professional assistance is advised.
Professionals are the best method to manage the compliance and tax duties that come with establishing an SMSF.
You should consider hiring an accountant, and you will almost certainly require a lawyer to create the initial papers.
Depending on what you want to do with the SMSF assets, you may also wish to consider seeking professional financial advice.
“Involving all of those professionals is the best way to alleviate stress on yourself,” Mark recommends.
7. There are expenses associated with running an SMSF.
SMSFs are not cheap; there are expenses associated with establishing and operating an SMSF.
Legal and accounting fees, as well as fees for other types of professional help, can be included.
Any expenses incurred mean that these money cannot be invested or utilised to fund your retirement.
“The recurring costs can be pretty significant,” Mark explained, “therefore the fund must be prepared to pay those fees.”
There are other deadlines to consider.
SMSFs must file an annual return with the ATO each year.
“If you don’t have a tax agency looking after your SMSF, the deadline is February 28th,” Mark says. “If you do have a tax agent, you normally have an extended deadline of May 15th.”
If you have a freshly constituted SMSF, however, the annual return must be filed by February 28, regardless of whether you have a tax agent.
9. SMSFs are popular among small business owners.
“Typically, people who manage small firms are not likely to contribute to retail or industry funds themselves,” Mark explains. “Those contributions are normally made by the employer.”
As a result, it is common for small to medium-sized firm (SME) owners to overlook their superannuation.
SME owners can ensure they are saving for retirement by establishing their own SMSF.
According to statistics, almost 50% of SME owners run their own SMSF.
“Another benefit is that if your small business operates from premises, you may be able to use your super fund to acquire those premises,” Mark explains, “and the rent you pay for utilising those premises will contribute to your super.”
10. SMSFs are not suitable for everyone.
If you have enough super and believe you can outperform your retail or industry fund in terms of investing results, you may wish to consider an SMSF.
But keep in mind that SMSFs are not for everyone; you must be willing to put in the effort required to set up an SMSF and manage it on an ongoing basis.
“Anyone who begins an SMSF bears a burden,” Mark explains, “you have to be prepared to see it through.”